- Global Investment and Multi-Asset Strategist
Skip to main content
- Funds
- Insights
- Capabilities
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
The US Federal Reserve (Fed) is one of the most influential drivers of global financial markets, so its monetary policy decisions and actions are obviously critically important. Sometimes, however, the market implications may not be as clear-cut as they might seem.
For example, conventional wisdom tells us that as interest rates rise, existing bonds decline in value. But today’s macro environment is more complex than this simple rule because of the current mix of stubbornly high inflation, weakening economic growth, and a not-so-remote risk of recession. Against this backdrop, I believe higher-quality, long-duration fixed income assets may prove resilient even if the Fed keeps raising short-term interest rates for many months to come.
The Fed hiked rates by 75-basis points (bps) at its July 27, 2022 FOMC meeting, as widely expected. By contrast, the Fed’s 75-bp rate hike in June overshot expectations for a 50-bp increase. However, I would argue that the central bank’s “surprise” move in June actually lagged the latest available US inflation data, as it came after an eye-popping headline Consumer Price Index (CPI) reading of 9.1% and a spike in consumer inflation expectations. The takeaway? Neither the market nor the Fed has a crystal ball but if past is any prologue, it is quite possible that the Fed will continue to follow the markets (based on incoming data), not lead them. But that’s not necessarily bad news for bondholders with longer-term investment horizons.
Interestingly, while fed funds rate futures contracts are signaling that the market believes the Fed’s terminal rate for 2022 will be around 3.25%, December 2023 futures contracts are currently trading closer to 2.75%, suggesting a belief that the Fed will reverse course and begin cutting rates by mid-2023 (Figure 1). Optimistic though it may be, if that forecast is indeed correct, it would certainly make a good case for owning US duration — particularly longer-duration, higher-quality bonds. Of course, the market could well be wrong.
But even if the market is wrong, I think the Fed is more likely to hike rates aggressively rather than too timidly. (In the FOMC press conference following the latest 75-bp hike, Fed Chair Powell commented that “doing too little raises the cost if you don't deal with it in the near term.”) In that case, I believe longer-term bond yields will fall as investors foreshadow more meaningful economic slowing in response to Fed tightening. We’ve already seen some early evidence that the US economy is feeling negative impacts from the Fed’s intense focus on “breaking inflation’s back,” even at the expense of growth:
The risk is that the Fed could back off from policy tightening in the face of weak growth, even while high inflation persists. In that case, I think the market would question the Fed’s credibility and signal as much with higher long-term bond yields — not a chance the Fed is willing to take, in my view.
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
FOMC: Patiently waiting to ease
Jeremy Forster discusses the Fed's steady policy rates, inflation forecasts, and potential interest rate cuts amidst economic uncertainties.
Weekly Market Update
What do you need to know about the markets this week? Tune in to Paul Skinner's weekly market update for the lowdown on where the markets are and what investors should keep their eye on this week.
New regime, new reality: Time to adapt?
Explore our latest views on risks and opportunities across the global capital markets.
Two key questions that bond investors should not ignore
Investment Directors Amar Reganti and Marco Giordano and Portfolio Manager Campe Goodman tackle two key questions that are likely to be top of bond investors’ minds during the second half of 2025.
Where to turn in an uncertain market
Nick Samoulihan explores strategies for navigating today's markets, emphasizing quality equities, strategic bond selection, and high-yield opportunities to balance risk and growth potential.
Return-seeking fixed income for an uncertain age?
Raina Dunkelberger discusses the role of flexible, return-seeking fixed income strategies against a backdrop of concentrated equity markets and global policy divergence.
Rapid Fire Questions with Campe Goodman
In this edition of “Rapid Fire Questions”, fixed income portfolio manager Campe Goodman shares his views on 4 key questions in this Q&A session.
Why the US dollar’s “crooked smile” could upend asset allocation
Brij Khurana explores the dollar smile theory's impact on asset allocation and foreign investors' strategies amid currency fluctuations.
The yen smile: New economic era upends traditional safe-haven currency relationships
Portfolio Manager Sam Hogg discusses the US Dollar Smile Theory and the Japanese yen's safe-haven status in the context of global trade and monetary policy changes.
Europe: a good hunting ground for high yield?
With attractive yields and a low duration profile, high yield can present potentially compelling opportunities for investors, despite the continued volatility.
Credit: the power of flexibility in an uncertain world
Uncertainty in credit markets can create opportunities for investors, provided allocations are flexible enough to benefit. But how can investors balance flexibility with discipline?
URL References
Related Insights